Client Information Bulletin December 2010
Feature Article: The Need for Succession Planning
You have spent 30 years of your life building a successful business. You are proud of your achievements and your family is proud of you. Your 35 staff are loyal and enjoy coming to work and 2 of your 3 children work in the business. Then, the unexpected happens – you die. Naturally, your family are devastated, but for those left behind, life must go on and so must the business.
What happens when:
- Your 3 children can’t agree on the future direction of the business? It was never discussed – you were in perfect health and hadn’t planned on retiring for at least another 10 years.
- Your will left the business to your 2 children who worked in the business as the sales manager and the general manager. Your 3rd child was left the remainder of your assets (shares and cash). Unfortunately, the business operated through a company, so the business wasn’t yours to leave to your children; rather it was owned by the company. The shares in the company were owned by you, and your 3rd child has laid claim to these. This has resulted in your will being disputed by 2 of your children.
- The sales manager doesn’t recognise the additional authority the general manager thinks she has and figures these titles didn’t mean anything because it was always you who ran the business.
- Whilst the dispute is underway, the business must go on but your children are now consumed by the dispute and aren’t concentrating on the business. After a month of family arguments, loyal employees are leaving one at a time and perhaps customers are too.
- The business you worked on so hard, for so long, is gone. Staff and customers have left. There is nothing to sell but plant & equipment, the proceeds of which should be just enough to retire the debt within the business. Your children (and their children) have now been left nothing and the previously strong family ties are gone. The business that you had hoped would be a legacy is now no more, and your family has been torn apart.
Naturally, this example isn’t typical of every business and touches on only a few of the issues that should be considered in succession planning. However, it highlights the importance of having a clear succession plan for your business – one that is understood and accepted by all parties concerned.
What is succession planning?
Succession planning involves the development of a strategy for the transfer of the ownership, management and financial responsibility of your business. It involves growing, retaining and passing on wealth from one generation to the next.
It isn’t a single event; rather a process that requires the identification of potentially complex personal, family and business issues and developing a clear course of action to enable such wealth to be managed for future generations that can take years from inception to implementation and even then, a process that requires continual monitoring and refinement.
For a number of reasons, it is often overlooked by many business owners, particularly those involved in a family business. Succession planning can highlight interpersonal and emotional issues. Equity between family members is also a common issue. It may be that there is a reluctance to deal with these issues now, so the whole planning process gets put on hold.
In reality, succession planning is too important to be left to chance (or to the next generation), or to be rushed and done poorly.
Do you have a succession plan and how can we help?
Consider the following questions and issues:
- What would happen to your family wealth (both business and passive assets) if you were to die today? Do you have a will in place that is consistent with your intentions? Too often, wills aren’t updated in line with business and investment growth – what is in the will might no longer be relevant. We will be able to sit down with you and your lawyer and go through your will to ensure it will achieve the intended outcomes for your family in a tax effective manner.
- Does your family know when you plan to retire? Are there any family members with the necessary skills to operate your business? Do any family members have the desire or ability to take over your business? Is there more than one family member who shows an interest in taking over the business? These issues need to be considered if you are thinking of leaving the business to your family members.
- Once you retire, how financially reliant upon the business would you be? Can the required level of financial support be achieved without selling the business? We can help you assess the level of wealth required to provide you with a required lifestyle into your retirement and we can evaluate different income stream scenarios to achieve the most effective outcome for your situation;
- If you sell the business, what effect would that have on other family members if they work in the business? Have family members been consulted to identify their expectations? If you do want to sell, do you know how much your business is worth? We can perform a valuation of your business to provide you with a degree of certainty over expected outcome if you do decide to sell.
- Upon your death, are business and non-business assets being equitably allocated? Do you own the business assets yourself or do you own shares in a company through which your business operates? It may be necessary to restructure your affairs in advance to ensure that in the event of your death, the structure of your affairs does not create abnormal or undesirable outcomes.
- Is the intention for ownership of your business to be transferred only upon your departure from the business or is there a structured and gradual transfer of ownership? What approach would suit your circumstances better? Is payment required for the transfer of ownership? We can help you put a structured process into action that will provide you with certainty over the transfer of ownership of the business.
- Are the taxation consequences of the transfer of your business understood? What about stamp duty? These two aspects, especially the latter, can often escape attention when making a will and the negative consequence does not come to light until the will becomes effective and it is too late to mitigate this risk.
- Is there any family politics – e.g family members who can’t see eye to eye and who might interfere with or hinder the profitable operation of the business into the future? You will need to consider these factors when thinking about the structure of your will and your succession plan.
- What type of entity does the business run from (i.e company, trust, partnership, sole trader)? Certain operating structures are more difficult to pass on to the next generation than others. Valuing an interest in a trust might be more complicated than valuing a shareholding in a company. Is there a structure in place to accommodate the intergenerational transfer of assets (both business and investment assets)? We may be able to restructure your business to avoid adverse taxation and stamp duty implications upon sale or your death. This may also make it easier to administer your estate in the event of death and may ensure that the intended outcomes are achieved affectively and with minimum worry for your family.
- Where there are multiple owners, is there a mechanism in place in the event of the death or incapacity of one of the owners for the remaining owners to acquire that owner’s interest without placing an unmanageable financial burden on the remaining owners (and therefore the business) – e.g buy / sell agreements, key-man insurance? In this situation, succession planning can provide all the business owners with comfort and certainty over the future of the business, should one of the owners run into financial or health problems or die suddenly.
Not all of these issues will affect you, but many of them will. It may be that you’ve been busy working in your business and haven’t had the time to work out when and how you can stop working in but rather on your business.
Ruddicks can set the wheels in motion for you to develop a succession plan that satisfies your needs and the needs of your family.
Investment Allowance Reminder! Installation by 31 December 2010!
If you ordered an eligible asset for investment allowance purposes prior to 31 December 2009, you can claim the investment allowance for your business if you install the eligible asset by 31 December 2010. The investment allowance claim would be made in the 2010/11 tax return and the allowance will be calculated on 50% of the asset cost if your turnover is under $2m or on 10% of the asset cost if your turnover is over $2m.
ATO Benchmarks, Audits and Focus on Cash Transactions
The Australian Taxation Office's benchmarking process is now being used to identify businesses that may be operating in the cash economy and to check taxation assessments. The ATO benchmarks are financial indicators, such as the cost of goods sold margin, achieved by other businesses in the same industry. The ATO have instigated a program whereby thousands of “small” businesses (i.e. as defined by the ATO, businesses with a turnover of $15 million or less!) will be monitored over the next 12 months and, if a business appears to be performing outside the "norm" established by the ATO benchmarks, then the small business owner will probably be subjected to an audit.
Businesses that fall outside the benchmark for their industry may receive a letter asking for the relevant taxpayer to provide reasons. If you fail to keep proper records and the business' financial performance is outside the benchmarks established for a particular industry, then the onus will be on the individual operator to prove that the Australian Taxation Office should not apply the industry benchmarks to that particular small business. This will prove to be extremely difficult if proper records have not been kept to support transactions for the business.
It is foreseeable that honest taxpayers who do not engage in fraudulent activities will still be sent such letters, especially where the business does not fall squarely into a specific business category, or the business operates in a geographical area which is not representative of the average population, e.g. rural areas.
The ATO has issued guidelines as to how they will undertake benchmarking audits. These include:
- A letter will be sent to the taxpayer, with a copy to the tax agent, advising that the taxpayer's business is outside the benchmarks for that particular industry;
- If deemed necessary, the ATO will request the client's records be submitted to the ATO for review. If the records are found to be acceptable there will be no further action taken by the ATO. (This highlights the necessity to ensure that proper records have been kept for all business transactions);
- Should the ATO deem that records are inadequate, the taxpayer will be advised that he/she will need to produce further records to support the variation from the ATO's benchmark for that industry. Without proof, or other compelling reasons, the ATO will then apply the benchmark to determine the taxpayer's assessable income;
- If a small business receives a request from the ATO, relative to a benchmark audit, the taxpayer will have 14 days to respond to the request. Whilst it is not always mandatory to respond to such a request for information, refusal may open you up to possible ATO scrutiny.
If you have any concerns as to how your business performs against the ATO's benchmark for your industry or you would like us to conduct a review of your business records, please contact your Ruddicks advisor.
Paid Parental Leave Scheme
The Government’s new paid parental leave (PPL) scheme received Royal Assent on 14 July 2010.
The scheme is open to parents of children born or adopted after 1 January 2011 and will provide eligible working parents with 18 weeks of ‘Parental Leave Pay’ at the National Minimum Wage (currently $570 per week before tax).
Either parent or carer of the child (though not both parents) will be eligible for the PPL. The eligible parent is referred to as the ‘primary claimant’. In order to be eligible, the primary claimant must be an Australian resident and have:
- worked at least 10 months out of the 13 months preceding the actual or expected date of birth or placement of his/her child
- worked at least 330 hours during this period (on a casual, part time or permanent basis).
- had an adjusted taxable income of $150,000 or less in the income year preceding the child’s date of birth or placement, or the date of claim (whichever occurs earlier)
TIP: If a primary claimant is eligible for both the baby bonus and the PPL, they can elect to take the baby bonus instead. However, parents will only be eligible for either the PPL or the baby bonus in respect of the same child. The Paid Parental Leave Comparison Estimator on the Family Assistance Office website can help you work out whether PPL or the baby bonus is more beneficial in your circumstances.
What does PPL mean for employers?
PPL is funded by the Australian Government, not the employer. From 1 January 2011, you can choose to provide PPL to your eligible long-term employees (from the funds transferred to you by the Family assistance Office) if they are receiving more than eight weeks of PPL. This role will be voluntary until 30 June 2011, so you have time to make any necessary adjustments to your payroll system. If you choose not to provide PPL to your employees during this period, it will be paid by the Family Assistance Office. To make sure your business is ready to provide Parental Leave Pay, you can register for the Paid Parental Leave scheme through Centrelink Business Online Services or by calling the Centrelink Business Hotline on 131158.
You will receive PPL funds via electronic transfer into the business bank account you nominate on Centrelink Business Online Services or over the phone when you register. This will be done before your employee’s pay cycle cut off date and will enable you to provide PPL to your employee through their usual pay cycle.
You must withhold tax from the PPL under the usual PAYG withholding arrangements and include PPL in the total amounts on the employee’s annual or part-year payment summary. You will not be required to make superannuation contributions for PPL and it will not be subject to payroll tax liabilities or workers compensation premium liabilities.
More information is available on the Family Assistance Office website at www.familyassist.gov.au.
Changes to Consumer Laws
From the 1st January 2011, Australia will have a single National set of laws for consumer protection.
The new Federal Legislation replaces the individual legislation previously held by each State and Territory.
There are three key areas in the National Consumer Laws affecting small businesses, these include:
- Unfair Contracts: If a clause is unfair, it can be struck out by a court. It is recommended that you review the wording of your contracts, including warranties and conditions of sale.
- Consumer Guarantee: This covers items such as remedies, refunds and fixing defects.
- Best Practice Reforms: This includes mandatory cooling off periods and clauses relating to lay-by sales.
The National Consumer Laws are monitored by ACCC, ASIC and the State Consumer Departments. There are substantial penalties that can be incurred for breaching the National Consumer Laws.
The government has indicated the benefits for small business from the National Consumer Laws are educed compliance costs, especially relative to businesses that are trading in various parts of Australia, because hey will now only have to comply with one set of national rules. This should provide a more level playing field for businesses. More information is available at www.consumerlaw.gov.au.
We recommend that you have discussions with your lawyer to review the effect the National Consumer Laws will have on your business' operations.
Insurance Review of your Key Assets
Various reports have indicated that many Australian businesses are not carrying adequate insurance for one of the key assets within the businesses - the human beings that work within the business.
The types of insurance policies that should be considered include:
- sickness and accident cover (particularly for owners and directors);
- key person insurance (directors/shareholders); and
- insurance cover within buy/sell agreements (these relate to partnerships and companies to enable funds to be available to enable a buy out to occur in the event of the death or serious injury/illness of a shareholder).
Have you reviewed the adequacy of these type of insurance policies of the key people within your business?
If you would like us to review the adequacy of your insurance covers and determine the current valuation of your business so the adequacy of insurance covers for buy/sell agreements can be determined, please contact your Ruddicks advisor.
Attention! The first half of 2010/11 fiscal year is almost over. Have you reviewed your business' activities relative to:
- financial performance - actual versus budgets;
- key performance indicators;
- benchmarking your business against comparable businesses or against industry benchmark;
- debtors' days outstanding;
- stock and work in progress levels;
- stock turn rates; and
- cashflow position.
There is speculation that last month's rate increase by the Reserve Bank will not be the last. Have you factored in the increase in interest of costs in your forecast?
Christmas Parties and Gifts
With the festive season once again fast approaching we thought it opportune to provide some brief comments regarding the FBT, GST and income tax implications associated with the Christmas functions and gifts that businesses may provide to staff and clients at this time of the year.
Gifts (not entertainment)
The costs associated with providing Christmas gifts (e.g. hampers, gift cards etc) to clients will not give rise to any FBT liability but they will still be tax deductible to the business and GST input tax credits can be claimed, where appropriate.
Gifts provided to employees and their families will have FBT implications but they will also be tax deductible to the business and GST input tax credits can be claimed. However, as a general position where the gift has a value of less than $300 per person (e.g. $250 for employee and $250 for spouse) and it is a one off gift, it will be exempt from FBT as a minor benefit but will continue to be tax deductible with input tax credits available. Certain other gifts may be exempt from FBT where they fall within specific limited exemptions within the FBT legislation (e.g. airport lounge memberships, tools of trade, etc) regardless of cost.
The correct tax treatment of costs associated with Christmas functions can be confusing. It will depend on the method used to value entertainment for FBT purposes. The following is a summary of the treatment of function costs:
Entertainment costs (e.g. Christmas party costs) are only tax deductible, and GST input tax credits only available, to the extent that FBT is paid on the costs.